Cross-asset allocation changes at MMs during drawdowns / high vol periods
Been reading a good bit about the momo unwind / LS equity pod scare going on rn and was wondering how dynamic the high-level allocation is to PMs at multistrats during periods like this. When some pods are selling off positions or being stopped out by risk dept., does that excess capital usually just flow to the central book? or is it pretty rapidly reployed to either better performing pods/strats in that asset class, or even moved to other asset classes less affected? Just curious how quickly things can move from a high-level perspective at MMs.
Based on the most helpful WSO content, during periods of drawdowns or high volatility, multi-manager (MM) platforms tend to operate with a highly dynamic and risk-focused approach to capital allocation. Here's how it typically works:
Centralized Risk Management: When pods experience significant sell-offs or are stopped out by the risk department, the excess capital is often pulled back to the central book. This ensures that the platform maintains control over the overall risk exposure and avoids compounding losses.
Reallocation to Better-Performing Pods/Strategies: Capital is frequently reallocated to pods or strategies that are performing well or are better positioned to capitalize on the current market environment. This reallocation can happen relatively quickly, as MMs are designed to be nimble and opportunistic.
Cross-Asset Reallocation: In some cases, capital may be shifted across asset classes. For example, if equity strategies are underperforming due to a momentum unwind or other market-specific issues, the capital might be redirected to less affected asset classes, such as credit or macro strategies, where opportunities may be more favorable.
Speed of Reallocation: The speed at which capital is reallocated depends on the MM's structure and the market environment. Top MMs like Citadel, Millennium, and Point72 are known for their ability to move quickly, leveraging their centralized risk management systems and extensive data to make informed decisions.
Risk Constraints: It's important to note that all reallocations are done within the framework of strict risk constraints. MMs prioritize preserving capital and ensuring that no single pod or strategy jeopardizes the platform's overall stability.
This dynamic approach allows MMs to adapt to changing market conditions and optimize their performance even during periods of heightened volatility.
Sources: Credit - Pod Shop/MM vs. Distressed/Special Sits HF, Performance of the best PM’s at MM’s?, https://www.wallstreetoasis.com/forums/the-only-post-about-active-investing-you-will-ever-need-to-read?customgpt=1, Strategies that will continue to flourish?, Ask me anything - quant/quantamental Hedge fund manager/Consultant - Everything on liquid hedge fund strategies
It moves slowly for the most part. It is unlikely that if they are telling equity teams to gross down, they force fixed income teams to gross up in order to keep overall gross flat. In the near-term, overall gross will simply come down.
I've seen asset class shifts at some of the largest multimanagers, and they happen slowly. Say fixed income moving from 25 to 30% over a full year would already be a pretty large pivot.
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